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asset management

Top Global Macro Calls 2011 – Summary (Dec 17, 2010)


Summary of our top global macro calls for 2011 published earlier this month (in a three-part series) follows:
#Economic Backdrop: US GDP to accelerate during 1H’11 in response to policy initiatives, but to moderate in the
second half to deliver a below-trend 2.75% growth for 2011. Housing to remain weak yet stable and unemployment
to end the year just above 9%. EU to grow at a composite 1.5%, led by robust German growth. EM to grow at a
composite 6.5% and contribute over two-thirds of global growth (PPP). 8.6% floor on China GDP growth is forecast.
#US Equities: S&P to trade with a 12-mth forward P/E of around 14 by end-2011 (vs. 12.5x now). Per our
expectations of GDP growth and rate environment, and assuming EU sovereign crisis remains contained, the S&P
could hit 1,375. Capex to lead recovery in 2011, supported by essential consumer spending [Trades: Long Tech,
industrials & retail]. Below-trend growth favors large-cap, with buy-backs, dividend hikes and consolidations in play.
Cross-border M&A in Financials and Energy favored [Trade: Long US regional banks and short Canadian large banks].
#US Rates/Dollar: US yield curve to remain steep as the front-end remains anchored subdued inflation, stable
inflationary expectations, and Fed policy. Back-end may however rally post-Q1 due to supply constraints. HY to
outperform IG. Dollar to remain supported by higher real yields, gradual US economic recovery, EU sovereign issues
and China tightening. [Trades: Long forward rates and long CDX HY; Long Financials and early stage cyclical stocks].
#Potential US surprises: On the policy front, (1) a massive refinance program for GSE mortgages [Trades: builders &
home improvement stocks] and (2) incentives to use Natgas for transportation [Trades: gas producers, compressor
makers, fueling station supply chain]. On the negative, operational risk event of size involving ETFs is a possibility.
#Europe: Sovereign debt restructuring to happen in some form or shape [Trade: long 10Y Bunds against 10Y Spain].
European banks and the Euro to be pressured [Trades: Short German, French and Spanish banks; Euro to retest 1.20].
Europe remains the biggest risk to global markets in 2011. At the same time, we do like an export-oriented Germany
(and the DAX) and Holland; and see good relative value in peripheral EU debt, where funding has been secured.
#Emerging Markets (EM): Infrastructure build-out would be a key component of EM growth [Trades: Technology,
Materials (coal, copper, steel & cement), Capital Equipment and EPC (both global/local)]. However, rising inflation,
which is not import-led for the most part, will pressure rates. Inflation-induced rate hikes and lending curbs are the
headwinds to growth and in that sense EM inflation is the second biggest global risk in 2011, after EU sovereigns. We
expect China to raise rates (100bp), lift Required Reserves Ratio further, let the Yuan gain (~3%) and pursue supply-
side and price-control measures to tame inflation. EM currencies will maintain an upward bias due to capital inflows,
generally stable fiscal and external reserve situations and sharply reduced corporate leverage post crisis [Trades:
Long ex-Japan Asia currencies vs. G-3; Long EM local fixed income; Bank debt; Corporate debt in unloved but
improving places like Argentina; Long China 5Y CDS for 2x (~70bp now). China tightening to weigh on commodity
currencies (read Aussie) and materials. Brazil and China to be early movers given their weak performance in 2010].
#Commodities: Demand for soft commodities will remain strong, thanks to increasing affluence in EM [Trades: US
agriculture sector, high-yielding seeds, fertilizer, farm equipment, and protein stocks]. Gold will remain in favor as a
monetary substitute, but industrial/base metals will outperform. Crude to average around $85, while Natgas could
catch a bid, if there is policy support. [Trades: Long Silver (target $38); Copper producers; Gold funded in EUR & JPY].
#Correlation: Easing risk aversion to drive correlated(+) movements in JPY and CHF and in copper beating gold, while
SPX forward P/E would expand given its inverse correlation(-). Global GDP growth remains strongly correlated(+) to
EPS, and its current estimate signals double digit EPS growth in major markets. Correlation(+) between 10Y US and
SPX to firm up in 2011, while correlation(+) between Eurostoxx50 and EUR is to decline post EU debt restructuring.
#Macro hedging: Cheapness in volatility signals good value in forward volatility and 1Y variance swaps as portfolio
level hedges. Also short position in European bank stocks is a tactical macro hedge against a potential EU crisis.

– Shiva Ganapathy (See marcopoloam.com for more)


This proprietary and confidential document is a market commentary meant for informational purpose only and not an advice or solicitation or an offer to enter into any transaction.

Marco Polo Asset Management 75 Broad Street, New York